Software tracking could turn Chinese piracy into revenue

China has long been a major hotspot for software piracy. Efforts to track unlicensed software use, however, are giving companies a chance to find the offenders and turn them into customers. Or in some cases, targets for lawsuits.

V.i. Labs, a U.S. firm, helps makers of engineering and design software track the unlicensed use of their products. Pirated software from 12 V.i. Labs clients had a market value of US$1.2 billion in June 2011, half of it in China, said Vic DeMarines, vice president of products for the company.

"China has been a big issue," DeMarines said. "A lot of companies have written piracy off in China because they don't think you can do anything about it."

While the Chinese government is working toward eliminating piracy in the country, weak penalties and a lack of enforcement have led to a high usage of unlicensed software products, according to experts. In 2010, the market value of pirated software in China totalled US$7.7 billion, putting the country second behind the U.S., according to estimates from the Business Software Alliance.

In spite of the challenges, enterprise software makers are better positioned to turn some of those pirated copies into sales, DeMarines said. This is because their products are generally used by larger companies, which are easier to track and can afford to purchase licensed copies of the software.

"We think that's a better way to reduce piracy overall," DeMarines said "You need to target the organizations that should have the ability to pay license versus going after individual users or the people who crack the software."

Even if vendors add security to their products, software pirates need only 30 to 90 days to make unlicensed copies available over the Internet, DeMarines said.

V.i. Labs offers code its clients can integrate with their apps to track usage. Forty of them use V.i. Labs code to track when an installed application shows signs its a pirated copy. The data collected makes a record of what organizations in China are using unlicensed copies across how many different PCs. In Beijing alone, the company has found more than 5,000 different computers using unlicensed CAD software.

Clients have then used the data to reach out to the potential customers, who might not be aware they are using unlicensed software, DeMarines said. In China, most of the pirated software V.i. Labs finds is being used by manufacturers, design companies and universities.

V.i. Labs reports its clients recovering from 10 to 25 percent additional annual license revenue because of the data provided. In China, the most successful cases involve clients targeting firms that have a presence in the U.S. or are already active customers.

But offenders are not willing to pay in all cases, forcing some companies to take legal action.

Xiang Wang is a lawyer with Orrick, Herrington & Sutcliffe, which has been involved with more than a hundred intellectual property rights lawsuits in China. "We try to find the big fish, the companies that can pay or have enough cash to buy the software," he said. Software tracking helps pinpoint offenders. But finding the additional evidence is more challenging, he said.

In contrast with the U.S., Chinese law has no discovery process, meaning the burden of finding evidence falls largely on the plaintiff. Chinese courts will also not admit evidence obtained from private investigators, Wang said.

Instead, his law firm works by sending private investigators to go undercover and infiltrate companies that are allegedly using unlicensed software. The investigators will then supply whatever information they find to Chinese government regulators, which have the authority to conduct investigative raids. If a raid is conducted against a company, whatever evidence found is then admissible in Chinese courts, Wang said.

But even if a case is won, the penalties are still low for offenders, sometimes only at US$10,000, Wang said. "We have done over 100 cases, but the government has never been willing to shut down a factory because of piracy," he said. "The government still wants to keep people employed."

Given the difficulties with China's legal system, more companies are trying to take their piracy related lawsuits to the U.S., Wang said. A recent case occurred when U.S. based AWR, an electronic design automation software company, filed a lawsuit in California against Chinese telecommunications equipment supplier ZTE and its U.S. subsidiary.

The lawsuit alleged ZTE had used AWR's software with unauthorized key codes. For evidence, AWR relied on usage records obtained through a "phone home" feature in the software that linked it with AWR's servers via the Internet.

In June, AWR won a partial summary judgement from the court that held ZTE liable for breaching the license agreements of the software. The two parties have recently settled the case, but the terms of it are confidential, said AWR executive vice president Ted Miracco.

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